A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA). It is designed to allow older homeowners, typically aged 62 and older, to convert part of the equity in their homes into cash without having to sell the home or make monthly mortgage payments. HECMs are the most common type of reverse mortgage in the United States.

Key Features of a HECM Reverse Mortgage:

  • Eligibility: Homeowners must be at least 62 years old, own their home outright or have a low mortgage balance that can be paid off with the proceeds from the HECM, and live in the home as their primary residence.
  • No Monthly Mortgage Payments: Unlike traditional mortgages, a HECM does not require the borrower to make monthly mortgage payments. Instead, the loan is repaid when the homeowner sells the home, moves out permanently, or passes away. Borrowers must still pay property taxes, homeowners insurance, and maintenance costs.
  • Loan Proceeds: The amount of money a homeowner can borrow depends on several factors, including the borrower’s age, the home’s value, current interest rates, and the FHA lending limit. The older the borrower and the more equity they have, the more they can typically borrow.
  • Flexible Payout Options: HECM borrowers can choose how to receive their loan proceeds, including:
    • Lump sum: A single payment at closing (only option available with a fixed-rate loan).
    • Line of credit: Funds are available to be drawn upon as needed.
    • Monthly payments: Either for a fixed term or as long as the borrower lives in the home.
    • A combination: Some lenders offer a mix of these options.
  • Non-Recourse Loan: A HECM is a non-recourse loan, meaning that the borrower or their heirs will never owe more than the home’s value at the time the loan is repaid, even if the loan balance exceeds the home’s value.
  • Costs and Fees: HECMs have upfront costs, including an FHA mortgage insurance premium (MIP; typically 2% of the home’s value), origination fees, and closing costs, which can be rolled into the loan. There is also an annual MIP, typically 0.5% of the outstanding loan balance, which is added to the loan balance over time.
  • Loan Repayment: The loan becomes due and payable when the last remaining borrower sells the home, moves out permanently, or passes away. The home is typically sold to repay the loan, and any remaining equity goes to the borrower or their heirs.
  • No Prepayment Penalty: HECMs do not have prepayment penalties, so borrowers can pay off their loan early without incurring extra costs.
  • Loan Limits: HECM loans currently have a maximum loan amount of 1,209,750 as of 2025.
  • Counseling Requirement: Before obtaining a HECM, borrowers are required to attend a counseling session with a HUD-approved counselor. This ensures that they fully understand the loan’s terms, costs, and implications.

Advantages:

  • Provides financial flexibility for older homeowners.
  • Allows homeowners to access home equity without selling their home.
  • No monthly mortgage payments are required, reducing financial strain.

Disadvantages:

  • The loan balance grows over time, reducing home equity.
  • High upfront costs and ongoing fees.
  • Heirs may inherit less equity in the home.

A HECM reverse mortgage can be a valuable financial tool for older homeowners who need additional income or wish to tap into their home equity without selling their home. However, it’s important to fully understand the costs, risks, and long-term implications before proceeding.